Hi there,
I have recently set up in practice and have come across a situation that I haven't experienced before.
My clients own a small limited company with 2 shareholders each owning 50%. One shareholder has verbally waived her right to a dividend payment but not completed a waiver deed in advance. They did not contact me regarding this situation and I have only just found out after receiving the dividend voucher and realising that the payment from the company bank account did not reconcile.
What can I advise in this situation? Does the other shareholder have to be paid the dividend because the waiver was not issued in advance even though she does not want it?
I understand this is a one off situation so not keen on going down the route of reclassifying share categories.
Any insight would be gratefully received - as I said I am new to practice so please be kind!
Many thanks
Replies (30)
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...and also make sure that the waiver was valid in terms of was the company in a position whereby it could have paid both dividends if necessary?
What you cannot have is a company having assets of, say, £6000 and one shareholder desperately needing £4000 and the other saying "that's ok take a dividend of £4,000 and I will waive my right".
For that to be allowed the company must be able to show that it could have paid dividend of £8,000 which of course, in the example, it couldn't.
b*llocks. Although there may be tax implications there is nothing in company law to prevent a company distributing all of its profits to one shareholder if the others have executed valid waivers (which, BTW, does not include drawing up paperwork retrospectively).
The correct answer to the OP's question is to ensure that the dividend that was not properly waived is correctly recorded in the company accounts and individual's tax return. If she doesn't want the cash then it can be credited to her loan account. Job done.
The practical, but unprofessional - and wrong - answer is to advise the client to backdate the dividend waiver(s) and ensure there is no trace of that advice.
Its not as simple as 'get all waivers signed - job done'. You have to go a bit deeper. HMRC dont like dividend waivers. You say its a 'one off' - you need to ask why. Is it that one is a higher rater and the other not? I bet thats the reason - rather than it being for a real commercial reason.
A waiver must be in place before the right to a dividend arises. A waiver after payment falls foul of the 'settlement' rules - see the below link for an article on this very subject written in checklist format confirming the points that need to be considered.
https://www.accountingweb.co.uk/business/finance-strategy/dividend-waive...
See here for an article on this very subject -
I hate dividend waivers and would never use them. Far, far too many things can go wrong. If you're going down the unequal dividend route, alphabet shares is the turning to take at the fork in the road.
I also completely disagree with Ruddles' assertion that the company can pay all its profits to one shareholder. The courts have already held otherwise (Buck v HMRC) and there's no reason to assume that the decision would be overturned.
You misunderstand Buck. That was a tax case. There was nothing in the decision to suggest that the dividends in question were illegal. In fact the judge's comments support my view above.
Company law legal or not, you said yourself that they may be tax consequences.
Who wants tax consequences ?
Tax consequences may sometimes be a pill worth swallowing if the commercial objectives are more important, but that was not the point. Whatever the tax consequences, do you now agree that a company may legally distribute all of its profits to a single shareholder if there are valid waivers in place from the others?
Notwithstanding the fact that it was you that started with the oblique reference to the case, the relevant wording is
"The issue which arises is whether the dividend waivers come within the scope of the income tax "taxation of settlor" provisions" (confirming this is a tax case) and
"Indeed, the dividends were declared at a rate that would have been impossible due to the lack of sufficient distributable profits within the company were it not for the fact that Mr Buck had waived the dividends in respect of all his 9,999 shares." (if your assertion was correct, the judge ought to have said "was impossible" and there would have been no need for "were it not for ...")
If you are still in disagreement perhaps you would kindly make a less oblique reference to the part of the decision that supports your view.
Not at all, my inference is based entirely on what he did say, in plain English. "Would have been impossible ... were it not for waivers ...". Since there WERE waivers, the distribution must have been POSSIBLE. If your assertion is correct, there would have been no need for him to say "were it not for ..." So, you see, I am indeed relying on what he did say. (And I'm far from being the only one.)
Nevertheless, I'd be interested to learn your alternative intepretation of the judge's words.
It would have been impossible, were it not for the waivers.
If there are waivers, he makes no comment on the outcome. It might be possible, it might be impossible. He doesn't say.
A very strange interpretation of plain English. He doesn't need to separately comment on the outcome where there are waivers because that is already catered for in his statement (and yours). Each to their own, though.
No assumption. It's straightward interpretation (the only one possible) of plain English.
"A would not have been allowed WERE IT NOT for the existence of B". So the existence of B makes A allowable. QED.
Perhaps English is not your first language?
Putting that point to the side you earlier stated, in response to my post, that the courts had decided, in Buck, that a company could not distribute all profits to one shareholder. Bearing in mind that we're talking about the legality of a distribution - and not the tax consequences - where in the decision does it say that? Or are you just making an assumption?
He doesn't say it wouldn't have been allowed.
He says it wouldn't have been possible.
Stop making stuff up to justify your view.
He expressly makes no comment on what his decision might have been if circumstances were different.
In the context of legitimacy of dividends - what's the difference between "allowed" and "possible"? Stop making up stuff to hide the fact that you are wrong. Tell me where in the decision it says that dividends may not legally be paid to only one shareholder.
In fact, you're now contradicting yourself. You said earlier that the courts (via Buck) had decided that dividends could not legally be paid to a sole shareholder where waivers are in place. Now you're saying that the judge made no express comment on such circumstances (even though his comment does in fact cater for both sets of circumstances). You're obviously very confused.
Really ? Am I not permitted a view of my own ? I have to wait for some judge to tell me what to think ?
You've not swayed my view. Nor will you. But you're entitled to your minority opinion.
Oh I see - it's now just your view. You are of course entitled to your own opinion - though I'd question whose is the minority - but it would be better if you didn't try to support that view with an oblique reference to case law that does not in fact support it.
I don't think HMRC look at alphabet shares any less than they would look at waivers.
I have advised waivers from time to time provided they are properly documented and there are sufficient retained profits to pay out a dividend on all shares. This may result in one spouse paying less tax but isn't this what we advise every day in one form or another?
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-...
I don't really like Alphabet shares either. But they're easier to deal with than waivers.
Thanks Lion.
JAAdams (how do you tag someone?) please can you advise why you thing alphabet shares work whereas dividend waivers do not?
Thanks
M
Dividend waivers should NEVER be backdated.
However, one often finds that if one shows the client what a dividend waiver actually looks like, they will have a hunt around at home and find it They just need to know what they're looking for.